A lackluster summer

Eco Emerging // 4 Quarter 2021  
The recovery in emerging countries remains fragile. Several economies in Asia and Latin America went through an  
air-pocket in Q2 2021. The emergence of Covid-19 variants has triggered new waves of the pandemic resulting in  
production stoppages, which have been temporary so far but which are eroding business confidence. Companies  
are also struggling with supply-side constraints, including supply-chain bottlenecks and energy shortages, which  
are contributing to fueling inflation and indirectly straining household confidence. Lastly, the Chinese economy is a  
source of concern with its sluggish household consumption and with the construction and real estate sectors in great  
distress. Still, to end on a positive note, according to IIF estimates, the rise in non-financial private debt has been  
moderate so far when compared with public debt.  
The recovery in emerging economies is proving to be bumpy. In Q2 2021,  
real GDP plummeted again for one third of the twenty- seven countries  
in our selection. The only countries that reported stronger growth  
were the member states of the European Union, thanks notably to the  
rebound in the Eurozone. It was primarily the Asian economies that  
went through air pockets, mainly due to the reintroduction of lockdown  
measures following new waves of the pandemic caused by Covid-19  
variants (notably in India and Malaysia). And yet exports were still  
dynamic through June, even in Asia, and accelerated in other regions.  
Africa and the Middle East are the only regions where exports are still  
below the pre-pandemic level of 2019, which can be attributed to the  
oil production quotas that were maintained by OPEC+.  
The latest update of the IIF’s Global Debt Monitor provides a preliminary  
picture of the health crisis’s impact on debt in the emerging countries.  
The median increase in the public debt ratio was about 10 points  
of GDP between December 2019 and June 2021. In comparison, in  
the aftermath of the Lehman Brothers shock of 2008, the public debt  
ratio increased by only 5 points. For the non-financial private sector,  
in contrast, the median increase was equivalent to about 3.5 points  
during the two episodes. More surprisingly, corporate debt does not  
seem to have increased significantly more than household debt, even  
though companies benefited from emergency credit lines. With little  
or no unemployment insurance, households may have had to resort  
to borrowing to offset the loss of jobs or revenues (South Africa, Brazil,  
Colombia, Malaysia and Thailand). On the whole, although the IIF  
regularly warns about the increasingly high level of global debt (both  
public and private), the rise in the non-financial private debt has been  
moderate so far, when compared with public debt. Two exceptions  
are worth pointing out: Saudi Arabia and Russia, where non-financial  
corporate debt rose by 14 points of GDP. Yet Russia’s non-financial  
private sector is not in an excessive debt situation (the credit gap is  
less than 5 pp). However, both economies are vulnerable given the  
structural constraints arising from their lack of diversification, which is  
holding back their growth potential.  
Summer trends do not provide much room for optimism. Granted,  
vaccination campaigns are being rolled out at an accelerated pace.  
But the business climate is deteriorating (except in Central Europe).  
Surging inflation is straining household confidence and driving more  
central banks to raise their policy rates. So far central banks have  
increased their policy rate cautiously (even the central banks of Brazil  
and Russia, which have been very reactive, remained behind the  
curve). This cautious approach is justified by 1) the usual inertia of core  
inflation relative to headline inflation (especially in Asia), and 2) the  
results of business surveys showing that the ratio between the output  
price diffusion index and the input prices one is generally less than 1.  
The expected tapering of US monetary policy has triggered an outflow  
of portfolio investment, and exchange rates continue to depreciate  
against the dollar. Above all, the Chinese economy is a source of concern  
with its sluggish household consumption and with the construction  
and real estate sectors in great distress. These fears have already been  
reflected in the downturn in metal prices since mid-September.  
Another lesson that can be drawn from the IIF estimates is that the  
Covid-19 shock did not increase the external vulnerability of emerging  
countries. At the aggregate level, the increase in the foreign-currency  
debt of non-financial agents (governments, companies and households  
combined) was more than offset by the increase in official foreign re-  
serves, despite the volatility of portfolio investment.  
The threat of a stronger-than-expected Chinese economic slowdown in  
Q4 2021 and 2022 presents a new downside risk for growth in emerging  
countries. If the slowdown is limited to the construction and real estate  
sectors, then the impact on Chinese demand could be circumscribed.  
Indeed, higher infrastructure spending could partially offset the shock  
that is already being felt in residential construction. Yet the indirect  
impact conveyed via the commodity channel is likely to be much faster.  
The first in line are the Latin American countries, which are already  
The ratio of foreign-currency debt to foreign reserves has diminished in  
the vast majority of countries, with the notable exception of Turkey, and  
to a lesser extent, Saudi Arabia and Colombia. Another positive point is  
that emerging countries have maintained their capacity to issue debt  
either on the international markets or on their domestic market. With  
a few exceptions (Turkey, Brazil, Colombia), CDS spreads on sovereign  
debt have hardly widened since March 2020 despite the rise in public  
borrowing requirements. Sovereign issuers have relied on domestic sa-  
vings and also non-resident portfolio investors.  
François Faure  
The bank  
for a changing  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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